Don't panic! That's the panicked cry of governments and central bankers around the world. Meanwhile their behaviour shows that they expect a very, very deep recession.

After repetition over more than a quarter of century -- by mainstream economists, ministers, the World Bank and International Monetary Fund -- neo-liberal platitudes have been forgotten. Today, we just aren't hearing about the efficiency of markets, the importance of balanced budgets or, better, budget surpluses.

Bush in the USA and Brown in Britain have been prepared to shell out billions to prop up the financial system. The pattern is being repeated, with local variations across the developed world.

Less than a year ago, before the election that made him Prime Minister, Kevin Rudd reassured Australian business that he was 'a fiscal conservative'. But the Labor Government decided valour was the better part of discretion by speeding up expenditure on public infrastructure from the Future Fund. Again, this was designed to reassure corporate Australia: Labor will do whatever it takes to secure growth and, especially, their profits.

In the face of the crisis, a prolonged and careful assessment of how to spend the billions of dollars in the Fund on competing projects was set aside. It was necessary to get the money flowing to make up for the anticipated slow-downs in Australian investment, consumption and income from the export of minerals to China.

The Australian Reserve Bank Board, on which the head of Treasury sits alongside a majority of corporate heavyweights, has the same fears as the Government. So it slashed the official interest rate by a whole one percent on 7 October, for the first time since 1992.

Australia is following a pattern set in the United States, Britain and other countries in Europe.

This looks like Keynesian economics, where the government steps in to sustain growth, to make up for the deficiencies of markets. But the massive policy shift underway is more than Keynesian, as states are taking over some very large businesses.

Governments in the most prosperous countries in the world have been providing tens and hundreds of billions of dollars to bail out private and state banks. In the USA, Britain, Belgium, Luxembourg, the Netherlands and Iceland, they have nationalised failing banks.

Will these policies work? It's unlikely.

After the pit of the Depression of the early 1930s, the US economy stagnated for a couple of years and then entered a new downturn. World War II not President Franklin D. Roosevelt's 'New Deal" economic policies, really ended the Depression.

Hard-core Keynesian policies never had to be applied during the 1950s and 1960s because economies were chugging along nicely for other reasons. Instead the concern of economists during that period was 'fine-tuning' or, more accurately, tinkering with policy.

When the long post-war boom ended in the mid 1970s and the Keynesian heavy guns were rolled out their impact was more that of a fart than an explosion. There was rising unemployment and inflation, which was supposed to be impossible according to the Keynesian orthodoxy of the period.

Already Republicans in the United States and conservatives elsewhere are expressing concerns about creeping 'socialism', as governments take over some banks and promise to regulate the rest much more closely. There is bound to be even more overt state involvement in economic activity as the crisis deepens.

Indeed, the famous social democratic economist Rudolf Hilferding believed that it was possible for the working class to take state power by parliamentary means and to overcome the pattern of booms and slumps on the road to socialism. Twice during the 1920s, he was Germany's Finance Minister. He argued that the growing domination of production by larger and larger corporations meant that a government putting in place a forthright program of reform could achieve this by managing the capitalist economy and particularly through state control over the banking system.

It must be noted, however, that neo-liberal policies of liberating markets, privatising, corporatising and contracting out state activities were themselves state policies, mainly designed to put the pressure on workers who actually produce the wealth on which profits are based. In Australia, the conservative Howard Government's market-freeing activities went hand-in-hand with a bigger role for government in policing the population in general and unionists in particular.

Even heavy-duty state intervention is unlikely to solve the world's current economic problems for two reasons.

First, the problems are not simply financial. As Henryk Grossman put it in 1929, before the stock market crash,

the very laws of capitalist accumulation impart to accumulation a cyclical form and this cyclical movement impinges on the sphere of circulation (money market and stock exchange). The former is the independent variable, the latter the dependent variable.

In other words, the way capitalist production is organised necessarily gives rise to economic crises. Developments in production directly and indirectly affect the financial system.

More 'transparency' and better regulation of banking won't deal with the underlying issue which is low average rates of profit across the global economy.

During the long boom after World War II, capital intensive investment meant that outlays on employing workers declined compared to business spending on machinery, equipment, buildings, raw materials and other goods used in production.

Yet it is only the labour of workers that creates new value. The rate of profit fell and the period between the mid 1970s and the early 1990s saw the deepest global recessions since the 1930s. Profit rates have recovered somewhat, largely thanks to neo-liberal policies that squeezed more work out of employees and, especially in the United States, led to declining real wages.

Even so, the rate of profit did not recover to the levels of the long boom to the early 1970s.

So those who own and manage corporations often prefer to invest in speculative financial assets rather than activity that produces real goods that people need. Most of the transactions on financial markets are a zero sum game: players only gain at each other's expense. While the US finance sector only realised 10 per cent of total corporate profits in 1980, the figure was 40 per cent in 2007.

So developments in the real economy explain the speculative frenzy that led to the credit crunch. Capital flocked to high-return, high-risk investments in the unproductive financial sector because profit rate in the real economy was low. The financial crisis is bringing that underlying problem of a low profit rate to the surface.

Capitalism has a tendency to break down that is expressed in deep crises like the current one. Grossman argued that

capitalist production is characterized by insoluble conflicts. Irremediable systemic convulsions necessarily arise . . . from the immanent contradiction between value and use value, between profitability and productivity, between limited possibilities for valorisation and the unlimited development of the productive forces.

The fact that production is organised not to satisfy human needs but to make profits for the capitalist class is the ultimate cause of the system's recurrent crises.

Financial regulation and even an expansion of state ownership, which conservatives and supporters of traditional social democracy label 'socialism', cannot overcome this tendency. Governments will soon demand that 'everyone' tighten their belts. Unemployment will rise, while employers and governments try to boost profits by driving wages down.

In Australia, this will be easier because Rudd has promised not to touch key elements of John Howard's industrial relations laws. These include secret ballots for strikes, restrictions on union officials' ability to talk to their members at work, and the ban on 'pattern bargaining', that is, industry-wide campaigns. As the crisis deepens the priority the Government places on subsidising business will increase and it will be under pressure to cut back the public services, and spending on health, education and welfare that benefit the Australian working class which is roughly two thirds of the population.

The alternative is a real socialism in which workers replace production for profit with production to fulfill human needs and the despotic structures of all corporations with democratic control over workplaces and society as a whole. Now that neo-liberalism has ceased to be common sense, it is worth considering.

This article is based on the Deutscher Lecture which Rick Kuhn, Reader in Political Science at the ANU, will deliver in London on 7 November. Dr. Kuhn's book Henryk Grossman and the Recovery of Marxism won the 2007 Deutscher prize.